Japan has been an unlikely source of profits for equity investors over the past couple of years, as the Nikkei 225 finally surpassed levels not seen since the economic crash of the early 1990s derailed the country’s equity and property markets for the best part of three decades.
The outlook from analysts for 2025 is bullish: a Reuters poll of 18 analysts published in August forecast the Nikkei will rise beyond 42,500 for 2025, a rise of 20 per cent at the time and 15 per cent on current levels. One catalyst is again corporate reforms – amid continued attempts to make companies more responsive to shareholders and less in hock to founder-owners. Even rising interest rates, pitting Japan very much against the trend, could see valuation gains for certain parts of the market. BlackRock says it remains overweight on Japanese equities on the basis that the return of mild inflation and corporate reforms were adding momentum to the market.
This sounds counter-intuitive, but reflects Japan’s unique economic conditions after decades of near-zero, or negative, interest rates. The consensus is that rates will rise from a current level of 0.25 per cent to around 1 per cent in 2025, offering banks and financial services companies a boost to their profitability as net interest income expands. Two hikes this year have already proved a boon for Japan’s previously sickly banks and the likes of Sumitomo Mitsui Financial Group (JP:8316) have experienced a substantial share price appreciation in 2024, as well as a big leap in quarterly net earnings.